Geothermal: Out from under a rock

Government incentives and rising electricity prices are a boon for the once unloved sector.

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Old Faithful and expensive contraptions in the basement that never really worked - that's what many people think of when they think geothermal energy.

But thanks to advances in technology, a better political climate and rising electricity prices, geothermal is quickly losing its status as renewable energy's most unloved sector. In fact, investment in the sector jumped nearly fourfold over the last two years, to about $100 million last year.

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"This resource is available, and it could develop to 30 times what is currently used," said Curt Robinson, executive director of the Geothermal Resources Council, an educational and professional organization.

Robinson was referring to a recent study from the Massachusetts Institute of Technology, which he said predicted geothermal could account for up to 100,000 megawatts of electricity production by 2050, or about 10 percent of the country's current use. That's up from about 3,000 megawatts today, a mere 0.3 percent of the country's electric consumption. A megawatt is a million watts, enough to power between 400 to 900 homes a year, depending on electricity use.

The projected jump in geothermal electricity production assumes a big boost in government investment - some $500 million over the next 10 years, Robinson said.

And it comes largely from the use of so-called hot rock technology, where wells are drilled deep into the earth's crust. Water is injected, the earth's heat turns it into steam, which in turn powers a generator. Currently, most geothermal wells rely on tapping into water or steam directly.

Hot rock drilling could be done in all 50 states, Robinson said, as opposed to the limited sites now available for conventional geothermal.

And though the hot rock process is still too expensive for widespread use, other factors have led to renewed interest in conventional geothermal. Rising costs for electricity, for example, have made geothermal more competitive.

Geothermal electricity can be generated for about 4.5 to 6 cents a kilowatt hour, according to Subir Sanyal, president of GeothermEx, a California-based geothermal engineering firm.

That's more expensive than coal - which can cost as little as 3 cents a kilowatt hour - but it comes without the dirty carbon emissions.

And with residential electricity prices now averaging over 9 cents a kilowatt hour, it may be affordable.

But federal policy has influenced the sector as well. In 2005, geothermal became eligible for a federal renewable energy tax credit of 1.9 cents a kilowatt hour.

And state renewable energy portfolio standards have also helped. Under the standards, about half the states require utilities to buy energy from renewable sources in a bid to provide a stable market for renewable power.

An attempt to make this a federal mandate was recently struck from an energy bill just passed in the Senate, and was generally seen as a setback for renewable energy in general.

Then there's the money coming to producers from companies or consumers trying to offset their carbon emissions by buying carbon credits. Money from the sale of the credits goes to clean energy companies, including geothermal producers, and other projects that reduce carbon output. If carbon controls become mandatory, cash from this source could soar.

"There's no magic behind it," said Karl Gawell, executive director of the Geothermal Energy Association, an industry trade association. "When federal and state laws create the conditions where people can make money off geothermal projects, people develop geothermal projects."

As a result, investment into the sector has soared.

Venture capital flowing to geothermal totaled $100 million in 2006, according to the research firm New Energy Finance, up from $26 million in 2004 and zero in 2001.

In the public markets, Ormat (Charts) technologies raised $135 million last year selling shares in the second largest stock offering in geothermal behind the Philippine National Oil Co. That amount dwarfed all public money raised in the five years prior, where no year saw more than $10 million flowing into the sector.

"Because it's so small, there's large growth potential here," said Paul Ferreri, a renewable energy portfolio manager at McClurg Capital, a California-based investment company.

Ferreri added that there's lots of talk about Ormat being a likely takeover target.

Other companies with big plays in geothermal include Calpine, though the firm is in bankruptcy due to bad natural gas bets; Middle American Energy, owned by Warren Buffett's Berkshire Hathaway; Italy's Enel (Charts), and Chevron (Charts, Fortune 500), with two big projects in the Philippines and Indonesia.

Like buying stock in any company, Ferreri said investors should research the firms management and fundamentals before making a purchase.

He said to be wary of geothermal companies that are spending too much on R&D and not enough on sales.

The biggest challenge for geothermal, he said, is getting enough utilities to buy the power.

"The main utilities have to be willing to spend the dollars," he said. "So far, I see PG&E and a few others, but that's about it."  Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.